Five investment trends defining the first half of 2025

Wondering when the constant news flow around on-off US trade tariffs will end? You’re not alone. But we fear there is a lot more to go in this saga and the market volatility that goes with it.

This heightened unpredictability has created a difficult situation for investors as it makes forecasting the economic outlook and corporate profits challenging. It has also created difficulties in boardrooms as business leaders face complex decisions about whether investments can generate future growth.

With first-quarter reporting season ending, there is at least some reassurance of corporate health. Earnings have been resilient – and indeed have surpassed expectations overall. Yet these are backward looking and with such a hazy future, many companies have trimmed full-year guidance. Volatility is likely to continue until the details of US trade policy have been finalised, and there remains the risk this could end up being stricter than the market currently expects.

With this backdrop, here is a roundup of the main asset class trends that have characterised the first half of the year.

Investment trends in 2025

1. Tariff-led volatility

Markets reacted very negatively to President Trump’s trade strategy unveiled on ‘Liberation Day’ on 2^nd April. The proposed tariffs were much higher and wide-ranging than many had expected, and the US S&P 500 index fell 19% from its mid-February peak amid fears of a US and global recession.

With uncertainty around global supply chains and future demand, other world markets fell too with stock markets of major exporters such as Japan, Europe and especially China significantly impacted.

Yet indices rebounded quickly from the early-April lows after a series of concessions, amendments and about-turns from President Trump. In particular, the introduction of the so-called ‘reciprocal’ tariffs – which the Trump administration considers necessary to balance a country’s trade deficit – was suspended for 90 days for talks to be held. Instead, US authorities left a universal base tariff rate of 10% in place and hiked import taxes against China even further, before rolling those back too.

The subsequent U-turn in policy, and in investor sentiment, hasn’t quite been enough to correct all the losses seen in the US stock market since its peak, but the broad index is about the same level it started the year.

At this juncture markets seem to have grown weary, if not somewhat immune, to the erratic tariff threats. Instead, they are trying to price in where trade policy will ultimately land rather than reacting aggressively to each twist, turn, and ‘tweet’. That’s rational enough, but there is scope for disappointment if the ultimate position ends up exceeding the 10% baseline tariffs with extras for some nations, notably China, and certain sectors.

Already, doing business with the US is more difficult, expensive and uncertain, but a tighter turn of the tariff screw would mean a greater slowdown in corporate spending and consumer confidence that would seriously dent growth.

2. Return of the ‘magnificent seven’ but US dollar takes the strain

Given the high valuations attributed to US technology giants it was perhaps not a surprise they were a major casualty of the volatility at the beginning of April. While the broad S&P 500 index fell 19% peak to trough, the Nasdaq index, which is even more dominated by the so-called ‘magnificent seven’ fell 24%. Yet the area has made a vigorous recovery from the lows and recaptured its prior underperformance.

UK investors will not have felt the full benefit of this, though. The US dollar has fallen in currency markets, around 7% against the pound since the start of April, which makes US assets such as shares worth less in sterling terms. Consequently, the US has still been one of the weaker areas for UK investors this year and recent investments in the area will typically be showing losses.

Over the long-term, currency movements don’t usually tend to have much importance for stock market investments, relatively speaking, but as this episode shows they can do in the short term – and it poses an added risk to investments.

3. Other areas take the baton of performance

The US stock market has been great for investors for many years. Its outperformance can be traced back to the Global Financial Crisis in 2008 from which point it has beaten other major markets by a significant margin. Much of this related to the dominance of tech stocks such as Nvidia, Apple and Tesla, of course.

But recent events have caused investors to question whether the era of American ‘exceptionalism’ is drawing to a close. While there is no denying the growth opportunities in areas such as artificial intelligence where US businesses dominate, investors have grown wary of the risks posed by trade uncertainty. Some are having their heads turned by the relative cheapness of other markets and rethinking geographic asset allocation.

The average European fund is up more than 10% year to date whereas the average North American fund is down 6% - a stark contrast over such a short period. UK, Japan and Asian and Emerging Markets fund sectors have all provided a higher return than the US too. Whether this represents a sustained passing of the baton to other areas remains to be seen, but they are all cheaper areas than US equities which remain pricey by historic standards.

While the US is expensive for a reason – after all, it houses global leaders that continue to innovate and drive high growth – the valuations in other markets are at the other end of the spectrum. Despite the more lacklustre growth available in the UK and in continental Europe, there is less uncertainty from a political standpoint than the US and arguably a ‘bird in the hand’ when it comes to returns.

Performance within markets has also started to change. In the 2022-2024 period, and at the start of this year, smaller companies underperformed versus larger ones, pretty much on a global scale. This was largely caused by higher global inflation and interest rates alongside fears of potential recession – factors that tend to affect smaller and more indebted businesses. Yet since the post-Liberation Day low, smaller stocks have started to outperform in the UK and in Europe.

This is starting to favour active management in these markets as managers tend to hold small and mid-sized companies in greater quantity than the wider indices in their portfolios. However, in the US market smaller companies continue to lag. They are generally seen to be more susceptible to a domestic economic slowdown caused by tariff disruption.

4. Bonds lacklustre as inflation remains stubborn

Primarily, it was movements in bond markets that put pressure on President Trump to ease his tough tariff position. Interest rates on longer-dated US treasury bonds rose sharply in the wake of the Liberation Day announcements and have continued to rise amid fears around what large tax cuts will mean for the US deficit and debt pile.

Given the inflationary risks of tariffs, the Federal Reserve – the US central bank – has been in no hurry to cut interest rates – much to the annoyance of the President. It extends a period of bond investor disappointment as the ongoing delay to reductions in interest rates globally has acted as a brake on prices.

That's because when interest rates are high, investors can receive a higher rate of return in cash – taking no risk. Bonds have been particularly sensitive to this as they pay a predetermined and usually level return. Whereas, other investments such as shares or property, cashflows can rise to some degree in sympathy with higher inflation that usually accompanies elevated interest rates. In contrast, the fixed cash flows of bonds offer no protection as rates ratchet up.

While many parts of the bond market, especially corporate bond and high yield areas, haven’t incurred overall losses year to date (once you factor income the relatively healthy income they pay), it probably wasn’t what many investors would have had in mind at the start of the year. Yet from this point, they could provide attractive returns and a bonus of capital appreciation if interest rates do end up falling a bit more quickly than factored in – for example, in the event of marked economic slowdown. For this reason, bonds still play a vital role in a diversified investment portfolio at a time when cash and savings accounts are starting to lose their appeal.

5. Gold shines on

Unlike the US dollar and bonds, gold has benefited recently as a safe-haven trade, with the price of the metal propelled to new all-time highs of around $3,500/oz in April. Central banks, investors, and households in the East have emerged as heavy buyers in the bullion market, and the heightened global uncertainty has increased the allure.

In many ways, gold’s renewed popularity is linked to the trend of deglobalisation and heightened international tensions as central banks increasingly crave a non-politicised reserve asset. As the world continues to fragment geopolitically, this trend could continue. When things seem uncertain, the timeless and permanent nature of gold takes on greater appeal.

Gold also has a special status as a hedge against inflation – unlike paper currencies, so, pounds, dollars, euros and so on that get devalued over the years, gold’s supply is finite. And although it can be notoriously fickle in the short term, when measured in decades, it has done a good job in keeping up with rising prices.

Having lagged the bullion price for four straight calendar years, gold equities have finally found some better form. They have been the top performing area for fund investment in 2025 so far, although the area is highly specialist and should only form a small part of a diverse portfolio.